Econ 101: Government Interventions – Part One

Now that we’ve seen some of the basics involved in how the economy works, I want to take a look at government interventions into the economy. This topic has many aspects, so I’m going to tackle it in three parts. This first part deals with taxes.

It turns out that everything that government does is an intervention into the economy because all of the money used to pay for government comes from taxes; even borrowed money will later have to be repaid through taxes. Taxation is an intervention because it removes money from the free market and puts it into the coerced market. In effect, taxpayers are forced to buy some services whether or not they need them or even want them. Some taxpayers will use those services. Others will not use the services but support their use by other people and would have voluntarily paid for other people to use them. Still others will neither use nor support those services. But the taxpayer’s money goes to the services all the same, regardless of the category into which the taxpayer falls. This is what I mean by the coerced market.

Do you see why this would not be the most efficient use of the society’s resources? If all transactions in an economy are voluntary, the society as a whole is constantly becoming better and better off as all of its people are becoming better and better off. This is because all voluntary transactions necessarily leave all parties to the exchange better off than they were before; otherwise the exchange would not take place. If you have a choice of keeping your money or buying a service like house cleaning, you choose to buy the service only if you believe it to be of greater value than keeping the money. If each person has no choice in the matter, as when their money is taken to pay for a service whether or not they want it, then it necessarily follows that some people will feel better off and others will feel worse off, but there is no way of knowing whether society as a whole is better or worse off.

The very fact that the money used to pay for government services is taken rather than earned means that the economy is distorted from running at its optimal efficiency. But there are other problems as well. In the next article, I’ll discuss how it is that government cannot know whether it is using its own resources efficiently in efforts to achieve its stated goals.